Schedule - Initial And Deferred Purchase Price In Cash With Earn Out (Asset Sales)
This Schedule - Initial and Deferred Purchase Price in cash with Earn Out (Asset Sales) is a direct replacement for the schedule in the relevant business/asset sale agreement which deals with the purchase price. The default provision in each of the agreements is for the purchase price to be paid in cash at Completion. This schedule allows for the purchase price to be comprised of an initial cash sum payable at Completion and a further cash sum based on a multiple of the profits of the business during an earn-out period. The schedule will typically be used in an institutional buy-out (“IBO”) where a venture capitalist or large institution makes the acquisition but retains the management to run the business on a day to day basis. Having the earn-out incentivises the management team to perform.
The Deferred Consideration entitlement will be calculated by the Buyer’s Accountants by reference to the business’s profits but the Seller(s) will have the opportunity to disagree with the calculations and appoint an independent valuer. If any of the Seller(s) cease to be employed by the business before the end of the earn-out period due to ill health, death or termination of their service agreement (except for summary dismissal) then they will be entitled to the full Deferred Consideration. If not, then the Deferred Consideration will be pro-rated. The Deferred Consideration is subject to a cap, which must be specified. The Deferred Consideration can be set off against any sums owed to the Buyer for claims under the agreement (such as claims under the warranties). Protection of the business during the earn-out period is given in paragraph 4, which prevents the Buyer from artificially reducing the profits of the business thereby reducing the Deferred Consideration.
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